3rd Quarter Economic Perspective (2011)

• The world continued to worry about the possibility of global contagion from European debt problems. European leaders agreed to a second bailout for Greece, though individual member nations must agree to participate. However, problems began spreading to the larger economies of Spain and Italy, which saw their borrowing costs rise as investors feared that the European Financial Stability Facility wouldn’t be able to bail them out. Despite Greece’s attempts to balance its budget, at the end of the quarter it was still unclear whether the new measures would enable the country to qualify for its October round of assistance.

• The final estimate of U.S. economic growth during the second quarter was 1.3%. That’s slightly higher than the Bureau of Economic Analysis’s previous 1% estimate, and an improvement from Q1’s 0.4%.

• Unemployment remained stalled at 9.1%, according to the Bureau of Labor Statistics.

• Citing concerns about “significant downside risks to the economic outlook,” the Federal Reserve announced it will sell $400 billion worth of short-term bonds in its portfolio and buy an equal amount of longer maturities. The plan, which echoes a 1960s maneuver called Operation Twist, also will involve reinvesting principal payments on the Fed’s agency debt holdings in agency mortgage-backed securities.

• The last-minute resolution of the debt ceiling debate couldn’t prevent Standard & Poor’s downgrade of the U.S. credit rating (and ratings of various agencies linked to the federal government) from an impeccable AAA to AA+. Two other ratings agencies are watching to see what further measures are taken to tackle the deficit, including proposals from a “supercommittee” charged with finding at least $1.2 trillion in additional deficit reduction.